Growth in China: changing into reverse?

China, the world's second largest economy and one of the scariest places on earth to drive in. After years of ridiculous growth and prosperity, figures coming out of the nation have not been so good; a rising CPI has forced the Mandarins to raise rates five times this year, PMI has been falling more than expected, and their transition to a consumer economy has been having setbacks with falling imports.

China bulls say that this is nothing, a minor setback to the grand scheme, but long–time bear Jim Chanos thinks otherwise; he argues that all the remaining growth in the region is in their bubbling real estate and construction sector, and that a slowdown there might snowball into something far worse:

They've only seen an up market... ...there's the arrogance of the first-time bull…

A lot of people are willing to say China will slow down… ...the really scary thing is if you do the numbers and they cut back on construction it's not a slowdown, and they go negative real fast… ...the fact of the matter is if they hit the breaks really hard, the economy goes into reverse. It doesn't slow… ...nobody will say that publicly because it's unbelievable. But it happens to be the way the numbers work.

Is he just distorting his short or is he right on the money? I just feel he's been talking way too much about it lately.

Video after the jump.


Curious what the China-based monkeys have to say, has China's advance come to a halt?

Is it really in that bad a shape?

We can see the former happening right now, but I highly doubt the latter. Then again I'm no Jim Chanos.

Have a good one WSO.

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Comments (17)

May 19, 2011 - 9:24pm

Whether their economy is expanding or contracting, China must do something about its currency. They think that inflation will kill the yuan if they remove the peg, so to compensate they've accumulated about $2.5 trillion in foreign exchange reserves! The only way to stop it is if foreign governments stop accepting payments from them, but there's no way that's going to happen. By holding out, though, I think it will only be worse for China the longer they keep that peg.

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  • 1
Best Response
May 19, 2011 - 9:38pm

I am a China bear but they will keep the party going for as long as possible. Chanos is blowing his load way too quick.

The problem is that so much capital has been used to build productive capacity that will become worthless at a higher exchange rate. That's the flaw with GDP and using it as the primary benchmark, it measures worthless output as being equal to productive output. The amount of wealth that has been destroyed through all of the endless factories, the ghost towns and highways to nowhere, is tremendous. The counterargument is that a rising RMB will force them up the value chain but it will South Korea and Japan are going to fight fiercely for their respective segments. Not to mention that higher value added manufacturing is less labor intensive, which will put millions out of a job, if they can even get there.

The demographic situation has started to hit a tipping point, you can see it expressed in the wage inflation that is happening right now. There is a host of other problems like non-performing loans, environmental destruction, water shortages, agricultural issues, gender imbalances, gap between rich and poor, gap between coasts and inner regions, etc.

Would love to hear a sharp bull case.

May 20, 2011 - 11:45am
macro:
Chanos is blowing his load way too quick.

Agree.

The bottom line is that China has imported capitalism without democracy - it is impossible to sustain one without the other for an extended period of time.....and now the shit is sliding towards the fan. I'd give it another couple of years before things go south. Until then, pillage and plunder the bubble!

I do not create this system, and in fact once argued in favor of making it equitable....now I just exploit the FUCK out of it and think, "Fuck these assholes" the whole time.

Get busy living
  • 1
May 20, 2011 - 12:23pm
UFOinsider:
macro:
Chanos is blowing his load way too quick.

Agree.

The bottom line is that China has imported capitalism without democracy - it is impossible to sustain one without the other for an extended period of time.....and now the shit is sliding towards the fan. I'd give it another couple of years before things go south. Until then, pillage and plunder the bubble!

I do not create this system, and in fact once argued in favor of making it equitable....now I just exploit the FUCK out of it and think, "Fuck these assholes" the whole time.

I don't think there are very many examples of importing capitalism a la China's scale without democracy, so it's not like your argument has any precedent or is based on any facts. China is smart enough to realize that capitalism is a more efficient allocation of resources than Soviet-era government control, but the only way they allow their country to become fully capitalist is if the high-ups in the Party remain high-ups. Until then they will find a way to creatively tip-toe around the issue while milking the fact they have an obscene amount of people to exploit.

"Shit sliding towards the fan" is another bold overstatement. Does the Chinese government exaggerate economic growth and manufacture numbers? Of course. Is it going to implode spectacularly and go into a Japanese deflationary death spiral? Probably not. Most arguments against China argue that its primary strength is derived from cheap labor (helped by their absurd currency peg), and have none of the modern features of modern developed countries.

It's really quite foolish for the West in general to point at possible bubbles and scream 'overheated', instead of finding creative ways to figure out what leverage they actually have over China. The Chinese honestly don't give a shit about political negotiation in general, and will gladly sit on the fact that they are a major player in the USA's 14T deficit.

And good luck shorting shit in China to try to exploit this.

May 20, 2011 - 12:58am

Always nice to trust someone who never been to China be so bearish. He is right but everyone has 50% chance of being right.

The 'slowdown' is engineered by the government and is part of their 12-5 plan. A controlled slowdown instead of a bust scenario per Chanos. CCP jacked up interest rates and margin requirements before an actual bust, unlike the Fed, who did nothing until after subprime busted in August 07.

Wage inflation existed for 10 years and 2008 slowdown hurt labor deployment big time. Food inflation is global, thanks to the printer of global reserve currency.

China will not remove the peg. But not everyone remember 1997. Anglo-American logic never applies in China. Try something else.

Am I bullish? Probably not. But I do think that the Chinese market is a 6 month leading indicator of the World market in general.

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May 20, 2011 - 1:12am

long time bear jim chanos is a complete idiot about China... he's been calling the Chinese real estate bubble crash since early 2009.... prices have gone up 50% in many parts of the country since then - and more than 25% across the board on prime residential in cities.... he continues to say that it's "only a matter of time", but the reality is that by the time his so called "crash" occurs, which is more likely to be a 15-20% pullback then a real "crash", the market will have more than doubled since he started telling people to sell!

I love when people that have hardly ever set foot in China call a bubble here.

The reality, from someone who has lived here close to three years and invests in cities throughout the country, is that China's economy may not be a strong all around as the government has made it out to be, but that it does not really matter... not for the next ten years or so. Why? The government has SO MANY tools that it can use to prop up the economy, and they will use them, that there is literally no way you could see a year of under 4-5% growth here in the next 15-20 years. I really don't think it would be possible baring some sort of unforeseen war, terrorist threat, revolution, etc....

Everything in China would grow SO MUCH faster if they just modernized their system... but they don't. They make sure that bringing money in to invest takes months and months of cutting through red tape. They make sure that you need 500 approvals for everything. etc, etc... and each of these approvals has zero procedure. It's just a yes or no, and you have no idea how long it takes. If the government decides the economy is slowing down, they just issue a few more yeses for every no.

They could also stop the insane restrictions they have on the housing market and other major markets... people need to pay 60% down to buy a second home here! There is no securitization yet! You are simply NOT ALLOWED to buy a third home in most cities now but if they lifted that restrictions hundreds of thousands of homes would be purchased ON THE FIRST DAY.

There is so much pent up demand and growth, and the government has such gloriously powerful grip.... the stock market will remain volatile and corruption will remain a problem... but as things modernize that will only continue to bolster the economy.

count me in as a big time bull over the long run

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May 20, 2011 - 2:47pm
International Pymp:
long time bear jim chanos is a complete idiot about China... he's been calling the Chinese real estate bubble crash since early 2009.... prices have gone up 50% in many parts of the country since then - and more than 25% across the board on prime residential in cities.... he continues to say that it's "only a matter of time", but the reality is that by the time his so called "crash" occurs, which is more likely to be a 15-20% pullback then a real "crash", the market will have more than doubled since he started telling people to sell!

I love when people that have hardly ever set foot in China call a bubble here.

The reality, from someone who has lived here close to three years and invests in cities throughout the country, is that China's economy may not be a strong all around as the government has made it out to be, but that it does not really matter... not for the next ten years or so. Why? The government has SO MANY tools that it can use to prop up the economy, and they will use them, that there is literally no way you could see a year of under 4-5% growth here in the next 15-20 years. I really don't think it would be possible baring some sort of unforeseen war, terrorist threat, revolution, etc....

Everything in China would grow SO MUCH faster if they just modernized their system... but they don't. They make sure that bringing money in to invest takes months and months of cutting through red tape. They make sure that you need 500 approvals for everything. etc, etc... and each of these approvals has zero procedure. It's just a yes or no, and you have no idea how long it takes. If the government decides the economy is slowing down, they just issue a few more yeses for every no.

They could also stop the insane restrictions they have on the housing market and other major markets... people need to pay 60% down to buy a second home here! There is no securitization yet! You are simply NOT ALLOWED to buy a third home in most cities now but if they lifted that restrictions hundreds of thousands of homes would be purchased ON THE FIRST DAY.

There is so much pent up demand and growth, and the government has such gloriously powerful grip.... the stock market will remain volatile and corruption will remain a problem... but as things modernize that will only continue to bolster the economy.

count me in as a big time bull over the long run

The insane house-buying restrictions are in place because the only people buying homes are rich people who have nowhere else to park their cash in the country. The hedge fund industry is just barely taking off. No one trusts the stock market, there is no bond market, bank deposit interest rates run below inflation.

I just moved back to the US after 3 years based in Beijing. Commercial occupancy in Beijing was running around 50% and rents had exploded despite there not being any real increase in demand.

The fact of the matter is that China's command economy has created huge distortions. There is a glut of real estate and infrastructure development because it boosts county and provincial GDP figures even if the properties go unused. It's created an asset bubble that will pop at some point.

That said, I am bullish on China in the long run. Hong Kong only exists as a financial and trade center, because China's capital flow restrictions have prevented the same activities from occurring within its borders. The millisecond that the PRC reforms its securities and currency laws, HK will cease to be a relevant part of the global financial system. Shanghai and Shenzhen will eat the HKSE alive since almost every company listed there is a Mainland company seeking access to the international markets. HK itself is just a tiny shitty island with a robust property market built on the profits siphoned off of China's own regulatory inefficiencies. It has no other inherent value. All it takes is a few edicts from the CPC Central Committee for all of that economic activity to go to China.

The big issues in my mind are environmental damage, most importantly to the water supply, the rampant income inequality, and the glut of unskilled labor that needs to be reallocated (China's agricultural output is greater than the US's, but not hugely so. The US produces its agricultural output with 2-3% of its population, China requires >50%.)

May 20, 2011 - 5:05am

China will burst at some time,as all economies do.I am not aware of the all restrictions in the housing market,but increases in interest rates and in bank's capital are important,to restrain such huge growth and curb inflation.I recently read some pretty bad news about chinese real estate companies.When the bubble bursts,it will probably cause some problems to the world economy,but since China is mostly an exporting economy,its impact wont be huge.

However,over the long term,China has huge growth potential.

May 20, 2011 - 5:23pm
SalGr:
China will burst at some time,as all economies do.I am not aware of the all restrictions in the housing market,but increases in interest rates and in bank's capital are important,to restrain such huge growth and curb inflation.I recently read some pretty bad news about chinese real estate companies.When the bubble bursts,it will probably cause some problems to the world economy,but since China is mostly an exporting economy,its impact wont be huge.

However,over the long term,China has huge growth potential.

There's not been any burst for the since CCP took over China and there will not be any in the near future.

May 20, 2011 - 5:44pm
vitaminc:
SalGr:
China will burst at some time,as all economies do.I am not aware of the all restrictions in the housing market,but increases in interest rates and in bank's capital are important,to restrain such huge growth and curb inflation.I recently read some pretty bad news about chinese real estate companies.When the bubble bursts,it will probably cause some problems to the world economy,but since China is mostly an exporting economy,its impact wont be huge.

However,over the long term,China has huge growth potential.

There's not been any burst for the since CCP took over China and there will not be any in the near future.

http://www.google.com/publicdata?ds=wb-wdi&met_y=ny_gdp_mktp_kd_zg&idim…

Great Leap Forward? Cultural Revolution?

Technically not a burst and more of an outright catastrophe, but still huge CPC initiated economic disasters.

May 20, 2011 - 6:22pm

Vitaminc,

I love the Anglo-American logic not applying to China bit. Can you take the other side of every trade I make, or better yet, the reverse?

EDIT so as not to double post.

Tracer,

I'm not entirely sure HK will dry up over night when/if that occurs. Network effects can be stronger than anticipated and HK's tradition as a global trade center certainly doesn't hurt it. But that's a murky future.

"Dude, not trying to be a dick here, but your shop looks like a frontrunner for the cover of Better Boilerrooms & Chophouses or Bucketshop Quarterly." -Uncle Eddie
  • 1
May 20, 2011 - 6:49pm

You're right not to underestimate network effects, but a growing portion of the professionals in HK are PRC nationals anyway. It's also important to understand that HK's tradition as a global trade center is entirely based on its proximity to and relationship with China. It has few resources or labor capacity of its own.

It was a running joke when I was in Beijing that no one in HK had any real idea of what was going on in the PRC. There is a reason why every multinational financial institution from Carlyle to Goldman is scrambling to get decent offices set up in Beijing/Shanghai/Shenzhen.

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